Will I have to repay the loan that I have taken out on the retirement plan when I file for bankruptcy?

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Will I have to repay the loan that I have taken out on the retirement plan when I file for bankruptcy?

Bankruptcy is such a ordinary practice nowadays that people do not think twice about it. What people do not realized is that if you have borrowed money from your retirement plan, it does affect how this loan will be treated in the eyes of the bankruptcy law. This article will try to answer your apprehension regarding the loan from the retirement plan in the case when you are filing for bankruptcy.

As many of you are probably aware, nearly all retirement plans will allow you to have a loan against your own account. If and when you do that, and then subsequently file for bankruptcy, the status of the loan depends on the type of bankruptcy you have filed.

The loan you have from your retirement plan will not be discharged in the case when you have filed for Chapter 7 bankruptcy. You are still legally obligated to pay the loan back after the conclusion of the bankruptcy. This is because Chapter 7 dismisses the obligations you owe to other people, but since the retirement plan loan is made to yourself, this type of loan will be needed to be paid in full.

Chapter 13 bankruptcy is also known as the repayment plan. If you are filing Chapter 13, the bankruptcy court will define how much you will need to pay off the creditors, and the interval of time it will need to be paid off. Once all the criteria set by the bankruptcy court has been satisfied, you bankruptcy case will be discharged, leaving you debt free. There is no clear cut rules that the bankruptcy court follow to determine if you have to pay back the loan to the retirement plan if you are filing Chapter 13 bankruptcy. The basic rule of thumb that the court system will follow is to make sure that you have adequate extra income to repay the loan from the retirement plan. There is a general principle on how the bankruptcy court will rule when it comes to the loan from the retirement plan in a Chapter 13 bankruptcy filing. If you are near the retirement age, and you have little or no savings, the bankruptcy court will not ask you to fork over money to pay yourself back since you are already having financial difficulties.

How does automatic stay apply to the loan against my retirement plan?

A big advantage of bankruptcy is that you are granted automatic stay instantly following the bankruptcy filing. Automatic stay prohibits the creditors from contacting you, or harassing you for payment. So if you are repaying the loan you have taken out on the retirement loan, does that mean you are protected from this ongoing repayment using the automatic stay statute? The answer is NO. The legal definition of automatic stay requires that the creditors must stop pursuing your debt when you have file for bankruptcy protection. But if you have a loan from the retirement plan, it is borrowing from yourself, so there is no creditor involved. In this case, automatic stay will not stop you from paying yourself back into the retirement plan during the bankruptcy procedure, even though if you are filing Chapter 13 bankruptcy the loan can be discharged by the bankruptcy judge.

If you are going to be filing for bankruptcy protection, you should seriously consider seeking professional help with an attorney. You should pose all the questions that you have to a certified bankruptcy lawyer. It is in your best interest to find a bankruptcy lawyer who can answer every question and uncertainty you have. You want to make sure that this lawyer will do everything in his or her power to make sure that your bankruptcy filing goes smoothly. Please visit our website ToFileBankruptcyOrNot.com if you are looking for certified bankruptcy lawyers, or if you just need more information regarding bankruptcy.

Steve Sanchez has recently overcome the economic depression of 2008-2009 by declaring bankruptcy.  Even though bankruptcy has devastated Steve financially and emotionally, Steve has rebuilt his businesses in the last 6 months and he has not looked back since.One of his project is to educate people on bankruptcy.  Having gone through the ordeal himself, he has first hand knowledge of the pros and cons of filing for bankruptcy protection.  Please visit his site http://ToFileBankruptcyOrNot.com if you want additional information regarding bankruptcy.
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